When Xinhua Finance did an IPO on the Tokyo Stock Exchange
(TSE) with the help of Nomura Securities back in October of
2004, the folks at the TSE were delighted. Not only did the
IPO go off without a hitch, but the company also enjoyed a
strong valuation right out of the gate. Remarkable, really,
given that the company had never made a profit. But
considering it is a subsidiary of the Chinese
government-owned news agency, the smart money was betting
that profits would eventually come, and at very least the
competition would not.

Now, 3 years later, Xinhua is well down on its IPO price,
trading at about 30% of its peak. Institutional investors
must be wondering when they can expect to see a return on
their original investment, especially since Xinhua has also
recently tapped the NASDAQ market and it's stock price
is underwater there as well.

While the valuation trend line hasn't gone quite according
to plan, Xinhua nonetheless was a strategically very
important listing for the folks at the TSE. It marked the
first Chinese company to go public on a Japanese stock
exchange and was the cornerstone of a new master plan by
the TSE to try to transform the exchange into the public
market of choice for Asian firms -- much the same as NASDAQ
once was and London's AIM is now trying to become.

So expectations have been high that there would be more
Chinese listings -- perhaps of a higher quality. After a
dry spell, the next one finally eventuated in April of this
year in the form of Asia Media, another media-based firm.
This time, the IPO results were much more worthwhile and
from a launch price of just JPY650, Asia Media's stock
rose to a high of JPY2,055 over the next 3 months, before
falling back slightly in the last couple of weeks. Their
stock price on Friday was still a very respectable
JPY1,644.

OK, so far so good.

Enter in July, then, the third Chinese listing, Nineyou.
Once more a media company, but this time an online game
firm. Nineyou sought to build on the goodwill of the Asia
Media listing as well as being boosted by the backing of
underwriter heavyweight Morgan Stanley. On the
announcement of acceptance of its request for a listing
on the Osaka Stock Exchange, the expectation by stock
pundits was that this would be a high-profile IPO and
the harbinger of good things to come. Certainly, Morgan
Stanley had the IPO priced aggressively -- looking for
a post-listing market capitalization of JPY90bn
(US$750m), and to pull in JPY19bn (US$158m) for the
company and its various investors.

Everything looked good, and the company announced in late
June that it would list on July 12th. Then, on July 9th,
just 3 days before the intended listing, Nineyou dropped a
bombshell: it would be withdrawing its offering...! A lot
of people, not least of which Morgan Stanley and the OSE,
were left with egg on their faces and wondering just what
happened to make things fall apart so quickly.

So what did happen?

[Continued below...]

---------------------- M&A Advisory -----------------------

The Japan Inc. Advisory team is highly experienced in
helping foreign entrepreneurs both sell and buy companies
in Japan. Our experience includes:

We have a dedicated, experienced team that
specializes in smaller deals that other investment
specialists are not interested in. Email
jack.turner at japaninc.com for a free and confidential
consultation.

Nineyou is a Chinese-based online game company, although
its headquarters are in the Cayman Islands. The company has
done surprisingly well financially, making US$18.03m of
profit on sales of US$58.17m in 2006 and with forecast
profit for 2007 of US$40.11m on sales of US$109.50m. Quite
spectacular really, and we're sure that many people were
wondering why Morgan Stanley priced the issue so low, at
just 20x the company's earnings. Japanese online gamers
have much better PERs when they list, and one performing
as well as Nineyou should have been priced at least another
50% higher.

Whether it was coincidence or maybe the management holding
back information, we don't know, but as it turns out there
was indeed a reason for the low pricing -- a veritable
skeleton in the closet in fact. Nineyou revealed that it is
being taken to court for failing to pay US$10m in royalties
to the original developer of their biggest selling game,
and that the developer was also threatening to cancel the
master licence.

The game in question is called Audition, and is a monster
hit. It is currently the most popular online game for
Chinese females aged 14 to 26. Audition accounts for a
massive 60% of Nineyou's revenue and is licenced to the
the company by South Korean firm T3 through an intermediary
called Yedang Online. According to a HK newspaper, both
Korean companies lodged notifications of law suits in the
same week as the planned listing -- certainly great timing
to derail Nineyou's listing!

To their credit, even though pre-IPO investors had
committed to the stock purchases (per the Japanese book
building method of pre-selling stock to arrive at a market
price), Morgan Stanley and Nineyou's management did not
hold the early investors to their commitments and chose
instead to simply cancel the whole thing. Interestingly, we
couldn't find any local Japanese newspapers which reported
this unprecedented state of affairs -- although some online
sites did.

What this whole fiasco has done is to highlight the fact
that Chinese software and media companies do not come
without risk. In our opinion, any company from that
country which is making massive profits out of proportion
to the rest of the market is either being sponsored by the
State (so they're safe), or has a get-rich-quick program
that will inevitably lead to investors being milked. Such
appears to have been the case with Nineyou.

We know of other risky Chinese firms that have promised the
Japanese great riches but which instead have undertaken
mind-bending twists and turns in control and deal-making
that inevitably result in the investors being out of
pocket. In one case, the investors reputedly lost tens of
millions of dollars on a smoke-and-mirrors scheme. The
collective Japanese stock exchanges need to remember
that they are dealing with a mindset that is very different
from the relatively careful entrepreneurs of Japan.
Chinese entrepreneurs have only been allowed to practice
their skills for less than 15 years, and it is inevitable that
many are cutting corners as they learn how it's done.

The underwriters, too, should take the same notes. While
it is tempting to bring a high-profit foreign firm public in
Japan, and no doubt to collect a substantial amount
in fee income along the way, the fact is that if someone
slips up, the resulting mess can become very costly, both
in terms of cash and loss of reputation.

What was a bit disturbing in Nineyou's case was the fact
that the company's biggest product is not under their
control and could be taken away from them at any time
-- a fact that most definitely would have warranted a low
IPO price but which didn't seem to be well advertised to
the public.

The next scheduled Chinese IPO in Japan -- headed for the
TSE -- is thankfully not a media company. China Boqi
Environment Solutions Technology (Holding) Company is an
engineering business that deals with remediation of
pollution caused by coal-fired power plants. Since its
biggest client is the Chinese government, we can assume
that it is probably a safe investment. It will list on
August 7th and is being brought to the market by Daiwa
Securities SMBC.

We hope that this time around, Daiwa have done their
homework and there there are no last minute "gotcha's" in
terms of China Boqi's IP rights or business dealings...
Otherwise it could be some time before the fifth Chinese
listing hits the Japanese stock markets.

Readers may recall our news item several months ago (TT427)
about the big-selling Billy Blanks fitness videos. Now it
seems that Tokyu Hands will report its first profit in some
time thanks to hot sales of "Billy Blanks' Boot Camp"
videos. Although the videos are available through TV
shopping, young women who can't wait for their copies have
been making a beeline for Tokyu Hands, which is the main
physical outlet in Japan. (Source: TT commentary from
nikkei.co.jp, Aug 3, 2007)

The competition among companies to attract a shrinking
number of job candidates seems to be having an effect
on new recruits, who are apparently moving in increasing
numbers after they find that their first choice of
workplace doesn't match their expectations. This trend is
quite new to Japan, where the workforce is usually quite
fatalistic and docile about its destiny. Job placement
agencies are reporting that the level of people having
second thoughts has increased by 200% to 400% since
last year. As an example, Recruit Agent had 80 people
in the first quarter of 2006 looking jobs after having only
been with their current employer for just 3 months or
less. This year, the same company has about 170
people so registered. (Source: TT commentary from
nikkei.co.jp, Aug 3, 2007)

The governments of Australia and Japan have announced they
have reached an agreement on a new income tax treaty which
will replace an outdated 1969 agreement. The main benefit of
the new treaty is that it will substantially reduce the
withholding taxes placed on dividends, interest, and royalties
paid to companies active in one country while resident in the
other. In particular it means that opportunities to leverage
income based on intellectual property, equity, and finance
will be easier to pursue. The agreement was reached by both
finance ministers at an APEC meeting in Coolum, Queensland.
The new agreement must still be passed into legislation by
both countries. (Source: TT commentary from forbes.com, Aug
2, 2007)

You wouldn't want to be on the minimum wage in Japan. The
Central Minimum Wages Council, a government panel in charge
of reviewing the minimum wage is deadlocked in its
discussions with major employers over whether the raise
should be the JPY50 per hour the unions are asking for, or
the JPY5 (yes, just five yen) per hour that the employers
are offering. As a result, the minimum wages will not be
increased in October as originally planned. ***Ed: In case
you were wondering, the current minimum wage in Japan is
just JPY673 (US$5.60) per hour. (Source: TT commentary from
nikkei.co.jp, Aug 1, 2007)

After Fast Retailing made a bid of US$900m for the Barney's
New York department store business from Jones Apparel
Group, it must have thought that the deal was pretty much
in the bag. The company has now been jolted back to the
realities of the global market place, though, when the
original bidder Istithmar PJSC, a Dubai government
investment company, matched the Fast Retailing's bid and
thus now takes prior rights to buy the business. ***Ed:
This is a high-stakes game of poker, and although Fast
Retailing reportedly has a war chest of around US$3bn, we
would certainly not want to be bidding against the
government of Dubai!** (Source: TT commentary from
bloomberg.com, Aug 5, 2007)

=> LINC Japan Ltd., an affiliate of the LINC Media group,
is actively marketing the following positions for market
entry customers setting up in Japan, as well as other
employers of bilinguals.

** HIGHLIGHTED POSITION

LINC Media is looking for a junior but ambitious sales
and business development person to "apprentice"
themselves to learn the outsourcing business. While
the position will have a modest beginning, the right
person will find themselves on a fast-track to senior
management status within 18-24 months. LINC
Media has a proven track record of rewarding high
performers, regardless of age.

This will be a largely independent position and thus will
require someone with strong drive, self-motivation, and
imagination. Once new projects are successfully matured
into a sales contract, the delivery and subsequent
maintenance of the account will move back to the existing
team.

The successful candidate will have proven interpersonal
skills, be thoroughly bilingual, and be able to demonstrate
a high level of energy and understanding of how the
world works. The initial remuneration will be around
JPY4-5m base and a significant commission component.
Expected salary within 24 months is around 2x - 3x this
amount.

Early-30's Japanese female, with extensive background in
coordinating IT project work and teams. Has documentation
experience as well as design and training of teams subject
to software applications roll-outs. Additional work in
supporting and organizing senior managers' schedules, and
supporting general administrative tasks. Excellent English,
willing/reliable worker. Available September, can do
interviews now. Target salary JPY6.5m plus incentives.

_____________Japan Inc is worth every penny!__________
Don't forget you can get deeper analysis on Japan's
hottest new businesses and technology from the
quarterly edition of J@pan Inc. 1-year subscription
JPY3,600(Japan). It's so cost effective you can even get
your company to pay for it!
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